What are the gift, estate and inheritance tax benefits of investing in a PA 529 account?*

Federal gift tax –You can contribute up to $70,000 in a single year ($140,000 for a married couple filing jointly) for each beneficiary without incurring federal gift tax.  The amount contributed is prorated over 5 years so, for example, a $30,000 contribution would use $6,000 of the current $14,000 annual gift tax exclusion each year for 5 years.

Federal estate tax – If you die with money remaining in your account, it will not be included in your estate for federal estate tax purposes. However, if you choose to take advantage of the federal gift tax averaging option mentioned above and you die within five years of contributing, a prorated portion of the contribution will be subject to estate tax.**

Pennsylvania inheritance tax – Funds in the account are exempt from Pennsylvania inheritance tax. Depending on the relationship between the deceased account owner and the heirs, this can be a savings of up to 15% of the entire value of the account.

Completed gift – One of the unique features of 529 accounts is that a contribution is considered by federal law to be a completed gift from the contributor to the beneficiary. However, the account owner, not the beneficiary, controls the account. So if you are  both the contributor and account owner, the amount you contribute is removed from your estate but nevertheless you retain complete control over the assets – including the right to change the beneficiary or to withdraw the assets and use them for any purpose (subject to taxes and penalties).

For more information, consult your tax advisor or estate-planning attorney.

* The availability of tax or other benefits may be contingent on meeting other requirements. The earnings portion of a withdrawal not used to pay for qualified expenses may be subject to federal income tax and a 10% federal penalty tax; the entire withdrawal may be subject to state and local income taxes.

** In the event the donor does not survive the five-year period, a pro-rated amount will revert to the donor's taxable estate

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The Pennsylvania 529 College Savings Program sponsors two plans-the Guaranteed Savings Plan (GSP) and the Investment Plan (IP). The guarantee of the PA 529 Guaranteed Savings Plan is an obligation of the GSP Fund, not the Commonwealth of Pennsylvania or any state agency. Before investing in either plan, please carefully read that plan's disclosure to learn more about that plan including investment objectives, risks, fees, and tax implications.